The intersection of Fourth Street and Broadway is in the heart of a Santa Ana's downtown improvement district JOSHUA SUDOCK, ORANGE COUNTY REGISTER

SANTA ANA – Santa Ana has responded to a grand jury report critical of the way a downtown improvement district was created, contending that the city complied with state law in forming the district.

In a cover letter from Mayor Miguel Pulido, the city conceded that communications with downtown business owners could have been better.

"With the advantage of hindsight, the City would generally agree that all would have benefited from better communication with and between property owners during and after the formation of the district," the Dec. 20 letter said.

The Orange County grand jury in June issued a report saying that the city "appears to be in violation of state law" in the way it formed its downtown business improvement district.

The district, known informally as the PBID, for property-based improvement district, has been criticized by many downtown property owners since they began receiving special tax assessments in 2010 to pay for enhanced security, cleanup and marketing. Opponents said the assessments, which went to the nonprofit Downtown Inc. to provide the services and manage the district, largely benefited a few downtown bars and restaurants.

"These conclusions by the City Attorney and the response by the City is a victory for Downtown Inc., which provides services to Santa Ana's downtown using funds from the assessment," Downtown Inc. said in a statement.

"Downtown Inc. is pleased to have the question (of) the legality of the assessment of downtown property fully behind it now and looks forward to continued success in revitalizing Santa Ana's newly vibrant downtown for the benefit of all users and the City as a whole," said Ryan Chase, the nonprofit's board chairman.

While the response contends that the improvement district was created legally, it doesn't resolve the underlying political issues.

The City Council has been considering dismantling the downtown district for more than a year. The issue came up July 2, when the council couldn't muster a quorum to discuss it because three members cited conflicts of interest and a fourth, then-Councilman Carlos Bustamante, was absent because of his arrest on suspicion of a series of sex-related crimes. Later, the council was unable to meet a county deadline to add the assessment for what's formally called the Downtown Community Management District to the 2012-13 tax roll.

In December, the council decided it wasn't inclined yet to set a hearing on dissolving the district because of pending mediation between Downtown Inc. and opponents of the district.

Pulido said he's hoping for a resolution this month.

"As long as we can bring both sides together, and that is what we are seeking to do – as long as we can have a settlement, and we are very close," he said of the mediation process, "then we can go from there. Then all the issues will be put to bed."

One possibility would be returning to the type of business improvement district that existed before the city adopted a resolution in 2009 created that created the PBID. An assessment for that district had been levied on business license taxes.

Vicky Baxter, executive director of Downtown Inc., said the board would hold discussions in coming days on the nonprofit's next steps.

"Downtown Inc. has several avenues open, and the board of directors will decide the direction for the future," said Baxter.

Despite the city's response to the grand jury, opponents say they still want to see the district dismantled.

"The tax was too excessive," said Raul Yanez, who owns a downtown clothing store. "I'm out close to $30,000 that they threw away and I didn't get any benefit."

The city, in the response to the grand-jury report prepared by City Attorney Sonia R. Carvalho and other staff, took issue with a number of assertions in the report.

The city ordinance that governed the formation of the PBID required 30 percent approval of the properties in the district, with the votes weighted by assessed value. The state normally requires 50 percent, the grand jury report said.

The city responded that state law gives charter cities, such as Santa Ana, the authority to set a 30 percent benchmark and cited the example of four other cities, including Los Angeles, that had done so.

The life span of the PBID was set at 10 years, the grand jury report said, while the state limits the initial span to five years, with renewals for 10 years.

The city said the report was in error because the district was limited to a five-year span.

Because Santa Ana voted on behalf of its downtown properties in the election that formed the PBID and then used the city clerk's office to tabulate the vote, "there is a lack of impartiality, or certainly the appearance of one," the grand jury report said.

The city contended that under the state constitution, it couldn't be exempted from the vote without a special showing that publicly owned parcels received no benefits. It also said that the state constitution required that it tabulate the results, a process that took place publicly at City Hall, and that state law allows for the use of the city clerk.

The grand jury report said that funds collected under the PBID "only benefited a few and have not resulted in a direct benefit to the assessed property as required by California law." Shopkeepers on Fourth Street, a Latino-immigrant hub, have complained that the district and the nonprofit are aimed at "gentrifying" the area and driving them out.

The city disagreed, contending that it complied with state law and used a civil engineer to calculate assessments and determine benefits.

"While the City wholly disagrees with the finding, it does also acknowledge that there was a clear disagreement among the property owners regarding the specific use of the funds within the budget categories," the response said. "The presence of this acrimony does not indicate, however, that the funds are being expended in a manner inconsistent" with the state's constitution.

Without naming him, the grand jury also singled out downtown landlord Irv Chase and his relationship with the city for criticism, citing "an appearance of impropriety."

Chase, who rebranded his Fiesta Marketplace on East Fourth Street as the East End, and his son, Ryan Chase, have been proponents of the PBID. Chase's Fiesta Marketplace received most of the money dispensed in a 2008 city rebate program to encourage facade improvements for downtown buildings, the grand jury report said.

The city's response said that the faÃ§ade improvement program was "completely unrelated" to the downtown property district, and predated it.

"The Program followed common criteria for the disbursement of redevelopment tax increment dollars that were established and utilized in several similar programs administered by the City and other jurisdictions throughout the state," the city's response said. "The property owners were required to submit an application, receive approval from the City, document the expenses, and complete work prior to the payment of any refund."

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